world bank documentdocuments.worldbank.org/curated/pt/...world bank reprint series: number 374 mohan...

World Bank Reprint Series: Number 374

Mohan Munasinghe

Pradicc Application ofItegrated National Energy

IrPlaruiig (IE)Us'nMicrocomputers

Reprinted with permission from Natural Resouirces Forum, vol. 10, no. I (February 1986), pp. 17-38,United Nations, New York.

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Practical Application of Integrated National EnergyPlanning (INEP) Using Microcomputers

MOHAN MUNASINGHE

This paper describes the use of a practical microcomputer-based, hierarchical modelling framework for Integrated NationalEnergy Planning (INEP), and policy analysis. The rationale for the concept and the development of the methodology aretraced, following the energy crises of the 1970s. Details of the INEP pr,ocess, which includes analysis at three hierarchicallevels (the energy-macroeconomic, energy sector and energy subsector) are given. A description of the various nmodels, and

the scenarios and assumptions used in the analysis, as well as the linkages and interactions, is provided. The Sri Lankaenergy situation is summarized, and the principal energy issues and options derived from the modelling are used to

synthesize a national energy strategy.

1. INTRODUCTION apparent for greater co-ordination between energysupply and demand options, and for the more

The development of the concepts and effective use of demand management and con-methodology of Integrated National Energy servation (Munasinghe, 1983; Munasinghe andPlanning (INEP), and its subsequent application, Warford, 1982). Secondly, energy-macro-can be traced to the energy crises of the 1970s. economic links began to be explored more system-Before that period energy was relatively cheap, atically. Thirdly, disaggregate analysis of bothand any inbalances betweein supply and demand supply and demand within the energy sectorwere invariably dealt with by augmenting the identified greater opportunities for inter-fuelsupply. The emphasis was more on the engineering substitution (especially away from oil). Fourthly,and technological aspects. Furthermore, planning the analytical and modelling tools for energywas confined to the various energy subsectors, subsector planning became more sophisticatedsuch as electricity, oil and coal, with little co- (Munasinghe, 1979). Fifthly, greater reliance wasordination between them. placed on economic principles, including the

From the mid-1970s onwards the rapidly techniques of shadow pricing in the developingincreasing costs of all forms of energy, in lock-step countries (Munasinghe, 1980b; Munasinghe andwith increasing world oil prices, stimulated the Warford, 1978). The INEP approach makes u:c ofdevelopment of new analytical tools and policies all these separate threads. Several attempts usingwith the following results. First, the need became various types of energy models were made,

Professor Munasinghe is Senior Energy Advisor to the President of Sri Lanka, Chairman, Computer and Information TechnologyCouncil, and President, Sri Lanka Energy ManagersAssociation. He is also Chairman, Energy Research Group (IDRC-UNU), andEnergy Advisor, World Bank (on leave). He has written 14 books on energy, economics and computers, and over 80 technicalpapers.This paper was presented at the United Nations Workshop on Microcomputer Applications for Energy Planning in DevelopingCountries, 9-13 September 1985, New York. The author is grateful to Peter Meier for assistance with the modelling.The views expressed in this article are those of the author and do not necessarily reflect the views of the United Nations.

Natural Resources Forum © United Nations, New York, 1986

17

18 MOHANMUNASINGHE NRF VOL. 10, NO. 1, 1986

particularly in the second hialf of the 1970s, and it ning framework which helps to analyse the wholewas soon recognized that the constraints imposed range of energy policy options over a long periodby limited data, skilled manpower, and time, (IDRC-UNU 1985).posed formidable problems, especially in Co-ordinated energy planning and pricingdeveloping countries. Many of the early models, require detailed analyses of the interrelationshipsimplemented on mainframe computers, were between the various economic sectors and theirdesigned to be as all-encompassing as possible, potential energy requirements, on the one hand,and therefore proved to be too large and and of the capabilities and advantages andunwieldly. On the other hand, more specific disadvantages of the various forms of energy suchmodels tended to overlook important energy as electric power, petroleum, natural gas, coal andsector or macroeconomic linkages. Finally, most traditional fuels (e.g. firewood, crop residues andmodels were not policy-oriented, and were often dung) to satisfy these requirements, on the othertreated as mere academic exercises. This initial hand. Non-conventional sources, whenever thevlearning process led to a more hierarchical turn out to be viable alternatives, must also beanalytical framework that recognizes at least three fitted into this framework. The analvsis appliesdistinct levels of analysis, including energy- both to the industrial world and to developingmacroeconomic, energy sector, and energy countries such as Sri Lanka. In the former, thesubsector, as well as the interactions between complex and intricate relationships between thethese (Munasinghe, 1980a, c). This approach also various economic sectors, and the prevalance ofgives a better policy focus. More recently, the private market decisions on both the energyavailability of microcomputers has provided demand and supplv sides. make analysis andanalysts in developing countries with a relativelv forecasting of policv consequences a difficult task.cheap, powerful and flexible tool to develop and In developing countries substantial levels ofapply some of these ideas (Munasinghe ct .1., market distortions, shortages of foreigni exchange1985). as well as human and financial resources for

The rest of this paper describes the development development, large numbers of poor householdsand implementation of a microcomputer-based, whose basic needs somehow have to be met,policy-oriented, hierarchical modelling frame- greater reliance on traditional fuels, and relativework for INEP in Sri Lanka. Details of the INEP paucity of energy, as well as other things. add tomethodology, and analytical models, are pre- the already complicated problems faced by energysented in Section 2. Section 3 provides a brief plannerseverywhere.introduction to the energy situation in Sri Lanka. The broad rationale underlying IntegratedFinally, the different scenarios studied, and the National Energy Planning is the need for a flexiblemain policy issues and options derived from the and continuously updated energy strategy that willuse of the modelling framework, are summarized promote the best use of energy resources in orderin Section 4. to further overall socio-economic development and

improve the welfare and quality of life of itscitizens. Energy planning is. therefore, an essential

2. METHODOLOGY AND ANALYTICAL part of national economic planning. and should beMODEL FOR INTREGRATED NATIONAL carried out and implemented in close co-

ENERGY PLANNING (INEP) ordination with the latter. However, the word2. 1 METHODOLOCY iplanning", whether applied to the national21 METODOeconomy or to the energy sector in particular. does

Because of the many interactions and non-market not impil some rigid framework along the lines offorces that shape and affect energy sectors of every centralized and fullv planned economies. Plan-economy, decision-makers in an increasing ning. whether bv design or deliberate default,number of countries have realized that energy takes place in every econorn, even in those wheresector investment planning, pricing and managie- so-called free market forces reign supreme. Inment should be carried out on an integrated basis, energy planning, the principal emphasis is on thee.g. within an integrated national energy plan- detailed and disaggregated analvsis of the energy

NRF VOL. 10, NO. 1. 1986 MICROCOMPUTER APPLICATION OF INEP 19

sector, its interactions with the rest of the The second level of INEP treates the energyeconomy, and the main interactions within the sector as a separate entity composed of subsectorsvarious energy subsectors themselves. such as electricity, petroleum products and so on.

The scope of integrated national energy This permits detailed analysis of each sector, withplanning and supply-demand management may be special emphasis on interaction among the dif-clarified by examining the hierarchical framework ferent energy subsectors, substitution possibilitiesdepicted in Fig. 1. At the highest and most and the resolution of any resulting policy conflictsaggregate level, it must be clearly recognized that such as competition between natural gas, bunkerthe energy sector is a part of the whole economy. oil or coal for electricity production, diesel orTherefore, energy planning requires analysis of gasoline use in transport, kerosene and electricitythe links between the energy sector and the rest of for lighting, or fuelwood and kerosene forthe economy. Such links include the input require- cooking.ments of the energy sector, such as capital. labour, The third, and most disaggregate, level pertainsraw material and environmental resources such as to planning within each of the energy subsectors.clean air, water or space, as well as energy outputs. Thus, for example, the electricity subsector mustsuch as e'lctricity, petroleum products, fuelwood, determine its own demand forecast and long-termand so on. and the impact on the economy of investment programmes; the petroleum subsector,policies concerning availability, prices, taxes, etc., its supply sources, refinery outputs, distributionin relation to national objectives. networks and probable demands for oil products;

MacroeconomyMacro - level

Industry Energy sector Agriculture I -Interaction between

y energy sector and therest of the economy

Resource i / Resource avoilabilityrequirements ~(inputs K, L, M)Energy outputs / , Energy demandEnergy sector , r' \i (disaggregate)constraints J / National objectives

X' "and constraintsEnergy sector " ,1

Wood, Intermediate levell oil | lectricity Wood

Oi- ElectricitEnergy subsectorinteractions

Electricity subsector 'Micro level

Supply DemandSubsector planning

,' and management// \

- Investment planning - Pricing policy (LR)- Operations - Physical control (SR)-Loss optimization - Technological methods- Reliability optimization - Education and propaganda

Fig. 1 Integrated National Energy Planning framework

20 MOHAN MUNASINGHE NRF VOL. 10. NO. 1, 1986

the fuelwood subsector, its consumption pro- manually, at a relatively simple level, and onlyjections and detailed plans for rotation or later, as data and local analytical skills improve,reforestation, harvesting of timber, and so on. should more-sophisticated computer modelling be

In practice, the three levels of INEP merge and pursued. Furthermore, while the comput Xr modelsoverlap considerably. For example, a class of are being developed energy policy formulationdemand management issues that affects both should not be neglected-key options may bemacro- and micro-aspects of energy planning are examined using more-conventional techniques,those related to energy substitutions or energy and appropriate decisions be taken and imple-conservation. Within certain limits many energy mented (e.g. energy pricing, demand managementresources are substitutes for each other, although and conservation, re-afforestation, efficientconveniience in use and overall systems cost may cooking stoves, choice of renewable supplyvary widely. Hence, appropriate supply and technologies, etc.). Such early decisions willpricing policies may bring about significant shifts in facilitate timely action on important issues, andenergy demand for specific energy resources. they may subsequently be coherently incorporated

Integrated national energy planning (INEP) into the longer-term national energy strategy,should result in the development of a coherent set when the more-comprehensive computer runs areof energy supply and energy demand management carried out. Great care must be taken to ensure(ESM and EDM) activities which can meet the that the models represent the real world asneeds of many interrelated and often conflicting accurately as possible, and they should benational objectives. Energy planning must designed to provide answers to the questions thattherefore be developed to meet the overall senior decision-makers might be expected to ask.national objectives as efficiently as possible. The 2.2 THEANALYTICAL MODELspecific tasks of INEP and ESM and EDM include:(a) the determination of the detailed energy needs The analytical approach for Integrated Nationalof the economy to achieve growth and develop- Energy Planning is illustrated in Fig. 2, which isment targets, (b) the choosing of the mix of energy the modelling analogue of the conceptual frame-sources to meet future energy requirements at work shown in Fig. 1. The models are imple-lowest costs, (c) the minimizing of unemployment. mented on a MS-DOS compatible, 16-bit micro-(d) the conservation of energy resources and processor with 256 kilobytes of main memorvyelimination of wasteful consunmption, (e) the two floppy disc drives and a 10 megabyte harddiversification of supply and reduction of disc (optional). The modelling begins with andependence on foreign sources, (f) the meeting of analvsis of the overall macroeconomv in the firstnational security and defence requirements, (g) of three modules of the energy macroeconomicthe supply of basic energy needs to the poor, (h) acounting framework (ENMAC). The outputs ofthe saving of scarce foreign exchange, (i) the this step include projections of the sectoralcontribution of specific energy demand/supply (iccomposition of GDP and non-energy merchan-measures to contribute to possible priority dise trade.development of speciail regions or sectors of the The RESGEN energy model is run next. Theeconomy, (j) the raising of sufficient revenues demand equations in this model are driven by thefrom energy sales to finance energy sector GDP estimates passed from the macromodel.development, (k) price stability. (1) the pres- Other inputs are passed from the more-detailedervation of the environment, and so on. subsector models: the refinery configuration and

The steps involved in the planning procedure yield coefficients are drawn from the refinervusually include energy supply and demand analysis optimization model. and the estimates of fuelwoodand forecasting, energy balancing, policv formula- demand are taken from the fuelwood model.tion and impact analysis to meet short-, medium- As part of making the energy supply-demandand long-range goals, and the determiniation of a balance, RESGEN estimates which energyNational Energy Strategy. facilities must be built to meet the demand,

It is important to note that all of the thereby providing a year-by-year estimate ofcomputerized activities may be first carried out investment requirements. The basis for the electric

NRF VOL. 10, NO. 1, 1986 MICROCOMPUTER APPLICATION OF INEP 21

Macroeconomicassumptions

Balance of payments -ENMAC and Debt service ratioENERMAC Resource gap and finance(E eergy -macroeconomicframework)

GDP Energy sector .-i investment,r debt service,

oil-import bill

Energy sector Eassumpfions RESGEN EFAM .ric

(Energy balance (Energy finance a Pricecmodel) assessment model) assumptions

Subsector Energy balance ----------- -models Institutional and

financial impacts

0

- -- -- ---- - ,-

Fig. 2 The hierachical modelling approach for IntegratedNational Energy Planning

sector investments, which account for the bulk of estimates of the balance of payments, the financingthe total energy investment, is the generation plan necessary to cover the external resource gap, theof the Ceylon Electricity Board (CEB): because debt service ratio and other macroeconomicdifferent demand scenarios result in changes in impacts.future electric load growth, the analysis includes The RESGEN energy model passes thean examination of the timing of capacity incre- domestic energy transactions (e.g. sales from thements. An optimal dispatch model built into Ceylon Petroleum Company to distributors, orRESGEN also provides detailed estimates of CEB Ceylon Electricity Board sales to consumers) tofuel consumption as a function of plant avail- the Energy Finance Assessment Model (EFAM),abilities, hydro-energy limitations and the system which assembles a picture of the energy sectorload factor. financial flows among the key institutions and

The investment outlays, and their concomitant consumers in the sector. EFAM also providesdebt service obligationis. are passed back to the estimates of the Government revenue from themacromodel, together with the oil import bill (and sector (from petroleum product taxes, thethe smaller earnings from bunkers and petroleum Business Turnover Tax on Energy Institutions,product exports). These energy sector transactions customs duties, etc.). The financial flows areare merged with the non-energy transactions in a obtained by multiplying the physical energy flowssecond module of the macroeconomic model. (from RESGEN) by the appropriate set of pricesFinally, the third module provides overall and taxes: EFAM can therefore be used to assess

22 MOHAN MUNASINGHE NRF VOL. 10, 1NO.1,1986

the implications of alternative energy pricing and less than 16% of GDP during this period.taxation schemes. During the past decade intemational oil prices

Another more sophisticated multi-sector have risen sharply twice-in 1973-4 and in 1979-energy-macroeconomic model (ENERMAC) is 80. The overall increase was from less than US$2also available, to study wage, income and price per barrel in the early 1970s to US$34 per barrel ineffects. factor substituc -,i in production. 1980, with a modest decline to about US$27 perstructural change, etc. ENERMAC has a barrel by 1984. During both oil shocks, thetransactions matrix involving 10 goods/sectors, economic growth rate declined in industrial as wellincluding three energy-producing sectors, crude as in developing countries. The oil-importingoil imports, and six energy-consuming sectors developing countries continued to be highly(Munasinghe et al. 1985). The model produces a vulnerable to events in the world economy, notset of national accounts and balance-of-payments only because of high oil import costs, but also dueconsistent with the corresponding outputs to shrinkage of export markets, official aid flows,generated by ENMAC, as well as equilibrium access to international credit, etc. Each downturnwages and prices. 'IThe economy grows through in the developed countries had correspondingsectoral investments, and appropriate sector- adverse effects on the less-developed coulntries.specific production functions are used to produce The impact of these two oil upheavals on the Srisectoral outputs, as the model simulates year-by- Lanka economv is analysed below.vear into the future. ENERMAC is not fully The impact of the first oil shock of 1973-74 waslinked to the other models, but is used in parallel, somewhat cushioned in the Sri Lanka economy byas a complement, to study specific policy impacts a combination of factors. The strict exchangein a self-consistent manner. control regulations coupled with slow economic

growth ensured that the burden of oil imports was3. THE MACROECONOMY AND manageable during the following few years.

ENERGY SECTOR Though the oil import bill was a significant factor3.1 ENERGY-MACROECONOMIC in the balance of payments, oil imports fell due to

RELATIONSHIPS IN SRI LANKA the prevailing economic climate. The tumingpoints in the economy occurred in 1970 and 1977Sri Lanka, situated in the Indian Ocean, is a small with the change of governments and the veryisland of area 65 610 km2. which includes 959 km2 different economic policies adopted in each case.of inland water. The land area is compact, with a From 1970 to 1977 the economy was highlycentral hilly region. The rivers which spring up protected from external shocks by the closedfrom this region (the most important of them is the economic policies that prevailed. As a result of'Mahaweli Ganga') play an important economic those policies the first oil shock had no significantrole in providing hydroelectric power. Another impact on GDP growth. Tables I and II give themajor indigenous source of energy is the forests, key years in which significant changes took place inwhich have declined from about 44% of total land the consumption trends of petroleum products andarea in 1955 to about 24% in 1980, due mainly to in the petroleum oil import bill. From 1973 to 1977agricultural conversion and fuelwood use. the average growth rate of petroleum demand fell

From 1970 to 1977 Sri Lanka was essentially a by 3.3%. This could be interpreted as a generalclosed economy, with strict exchange control response to the doubling of petroleum prices in aregulations and import controls. This period was difficult economic period. Table II shows that upmarked by low investments and low growth to 1977 the cost of oil imports was not a source ofpattems; GDP grew at only 2.9%? per annum on serious concern to Sri Lanka.average, which was well below both the previous With the liberalization of the econoimy in 1977,performance of the economy (4.4% per annum in the growth rate of GDP from 197 7 to 1982 aver-the 1960s) and its inherent potential. One of the aged more than 6%. It is creditable that this washardest hit sectors was the manufacturing accomplished in a period of considerable inter-industry-due to the sluggish economy and the national economic turnoil - first, internationalpoor investment climate, investments averaged inflation accelerated-led by the doubling of oil


TABLE IConsumption trends for major petroleum productsa

Consumption Annual average growth(x 1000 tons) rates(%)

Product1970 1977 1980 1970-77 1977-80

Gasoline 148.4 111.6 107.7 -4.0 -1.2Kerosene 272.5 213.1 188.7 -3.5 -4.0Auto-diesel 254.5 261.4 399.5 0.4 15.2Industrial

diesel 87.9 46.3 61.0 -8.8 9.6Fuel-oil 208.8 134.7 247.2 -6.1 22.4Power sector

consumption 133.0 7.0 58.5 -34.3 + 102.9Fuel-oil (133.0) (7.0) (45.0)Diesel (-) (-) (13.5)

aExcludes re-exports and bunker sales.

Source: CPC.

TABLE IIPetroleum import bill

1970 1977 1980 1981

A Petroleum imports 10 160 489 515B Petroleum re-exports 5 64 181 172C Net petroleum imports 5 96 308 343D Non-petroleum exports 337 667 864 885E C as percentage of D 1.5 14.2 35.6 38.8

US$ Rs 5.23 15.56 18.(H) 2(1.85

Souirce: Sri Lanka Customs.

prices, then the recession in the developed the post-1977 period resulted in an acceleratedcountries reduced demand for exports and demand for electricity (which previously, duringconstrained aid flows. However, the second oil 1973-77, grew at an average rate of 4.7%), due toshock of 1979-80 had much more severe reper- the low tariff structure and untapped potentialcussions than the first, because of the open markets. The demand was met totally by hydro-economic policy. Table III gives a clear picture of power. During 1977-80. without taking intothe impact of two oils shocks. The periods are consideration the power cuts that prevailed,demarcated as shown because there were signifi- electricity growth averaged 10.2%. This had acant economic reactions and repercussions. The significant impact on the economy because thefirst period is 1970-73, the pre-embargo; then the supply had to be supplemented by thernal1973-77 adjustment period for the first oil shock. generation. The marginal increase in the demandThe years 1977-80 include the period of liberal- for commercial energy in Sri Lanka is directlyization of the economy and the second oil shock; linked to the size of petroleum imports, regardlessand 1980-82 gives the adjustment period after the of whether these increases take the form of highersecond oil shock. electricity consumption or direct consumption of

The rapidly improving economic growth during petroleum products.


TABLE IIIEvolution of GDP, energy demand and prices for the period 1970-82

Adjustment period Adjustment periodfor the firs! Intermediate for thle second

Pre-emnbargo oilshock period oil shock1970-73 1973-77 1977-80 1980-82

GDP growth rate a(%) 2.2 3.4 6.8 5.4Growth rate of total energy demand b(%) - 2.8 2.3 2.5Electricity demand c(%) 7.6 4.7 10.2 10.1Non-electricity commercial demand d(%o)

Demand for petroleum production (%) 0.9 -5.2 7.2 14.7Demand for non-fuelwood energy e(%) - 6.2 0.4 -0.2

Changes in energy pricesElectricity prices f(%) -3.12 -3.64 32.6 37.8Petroleum product prices g(%) 11.2 14.2 30 -3.0

a Annual average rate of change of real GDP for each specified period.b Annual average rate of change of total energy demand (commercial + non-commercial energy).c Annual average growth rate of electricity demand (either in original unit or converted unit).d Annual average growth rate of demand for each specified period.e Includes all non-commercial energy sources such as firewood, crop residues, cow dung. etc. converted into a common unit

(m.t.o.e).Charnges in weighted average prices (or price index) of all commercial energy sources.

g Weighted average of petroleum product prices.

Thus, after 1977 the combination of increased country's potential hydroelectric power isconsumption and a doubling of oil prices resulted estimated to be in the region of 2000 MW, of whichin a rapidly growing oil import bill. By 1981, the 369 MW has already been developed, with anothernet oil import bill more than trebled and the 572 MW being harnessed when the 'Mahaweli'proportion of export earnings devoted to import- scheme comes into operation. By the end of theing oil rose from 15% to 39%. The rupee, which decade, 50% of the potential capacity will havewas pegged to the dollar (floating exchange rate), been realized. Hydroelectric power is useddepreciated in value from Rs 15.608 in 1978 to primarily to meet base load energy generation,Rs 23.529 in 1983. The manifestation of these wh;lst gas turbines operate in the peaking modeforeign exchange difficulties along with inter- and also provide spinning reserve. This pattern isnational price increases has been a high inflation expected to continue for at least the next fiverate. Inflation, as measured on all major price years.indices, accelerated sharply between 1978 ant Although reliable data on fuelwood supply are1980, before reducing significantly by about 1984, difficult to obtain, the estimates clearlydue to restrictive macroeconomic policies. demonstrate the precarious and unsustainable

The recent decline in world oil prices had no nature of fuelwood supply. Over the past twoeffect on energy demand because the dollar price decades, incremental wood production-from thedecrease in the price of crude was offset by the natural regeneration of forests, agriculturalexchange rate fluctuations with the Rupee residues and rubber replanting, etc.-has fallendeclining in value against the dollar. far behind consumption, and today this source

accounts for less than half of the estimated annual3.2 ENERGY SUPPLY AND DEMAND consumption of around 5 million tons. The balance

IN SRI LANKA of wood supply has come mainly from the denu-dation of Sri Lanka's natural forest cover, which3.2.1 Principal energy sources has declined from about 44% of total land area inSri Lanka has two major indigenous sources of 1956 to about 24% in 1982.energy-hydroelectric power and fuelwood. The The balance of domestic demand is met by oil


imports. The crude oil imported is refined into oil, kerosene and auto-diesel. Table V gives theother petroleum products which are either used in energy consumption (petroleum and electricity)the domestic market or are re-exported. Table IV during and after the two major oil shocks.shows that the main types of oil imports are crude

TABLE IVEnergy supply (domestic and imported) in t. o.e.

1970 /97'/ 972 197? 1974 1975 /976 1977 1978 1979 1980 1981 19,82 /983

Domestic sourcesHydro 177 203 167 239 258 266 291 327 3(50 355 377 385 507Fuelwood and bagasse - 1226 1294 1561 1595 1618 2326 2234 2271 2379 2476 23811 3851

Net imports'(i.e. imports -- exports)

Crudeoil 1819 1549 1818 1753 1526 1464 1447 1529 1443 1444 1861 1711) 1940 1491Naphtha -115 - 77 - 117 --128 - 1)(X - 1?7 --1118 - 11I1 -74 -99 -- 1311 --91 --75 -- 54Gasolene 32 12 - t 1) ( ( I 3 6 () () () 14Av. gas 2 I 11 I I () 11 (t ( 1 1) () ()Kerosene 98 68 23 22 9 () 9 32 25 41 - I 41 54Avtur (I -1) 81 8--5 -73 -8(1 -68 -52 -25 --8 -- 134 58 - 86 -63Auto-diesel 56 42 17 11 8 11 8 26 82 198 42 IM)) 183 403

Hy/M diesel -73 --85) --72 72 - 64 -65 - -74 -68 -59 -49 -36 -8 -38Fuel-oil -43 -385 -443 -437 -3 14 -3411 --411 --418 -3511 - 372 --489 -439 --431 316

a There are no known sources of domestic oil or petroleum products.Sri Lanka imports crude oil which is refined-the negative values indicate the re-export of refined oils.

N.B. Conversion factois and coefficients based on efficiency of an average thermal base load plant:crude oil I tonne = 1.03 t.o.e.; LPG I tonne = 1.06 t.o.e.gasoline/naphtha I tonne = 1.06t.o.e., aviation gasolene I tonne = 1.06 t.o.e.fuel-oil 1 tonne = 0.98 t.o.e.; kerosene/avtur I tonne =1.05 t.o.e.diesolene 1 tonne -- 1.05 t.o.e.; fuelwood I tonne = ).45t.o.e.bagasse 1 tonne = 0.40 t.o.e.; charcoal I tonne = 0.65 t.o.e.coal I tonne = 0.7() t.o.e.; bitumen/solvents 1 tonne = 0.89 t.o.e.Energy equivalent:Hydro-electricitv generation (fossil fuel replacement)

1()0 kWh = t).24 t.o.e.

TABLE V3asic energy consumption in Sri Lanka

Adjustment Intermediate Adjustment periodPre-embargo period period second oil shock

1973 1974 1979 1983

1. ElectricitY consumption 74.497 76.737 111.65 153.9922. Imports

Diesel 0.W() 9.673 208.48 426.190Fuel-oil ().X) 0.00 0.() 000Crude oil 1805.83 1575.518 1487.34 1536.732

3. Fuel for thermal generationDiesel 1.363 0.468 1.46 264.366Fuel-oil 19.078 4.186 18.11 48.989

Data from the Energy Balance Tables (in t.o.e.).

Figure 3 shows the typical Sri Lanka energy dominates gross energy supply, with oil at 24%,supply pattern in 1983. Fuelwood (67%) oil-fired electricity at 4% and hydroelectricity at

26 MOHAN MUNASINGHE NRF VOL. 10, NO. 1, 1986

Thermaleleciricity 4° Hydro-electricity

46 % Fuelwood

Gross energy supply (1983) UJseful or net supply (19833

Fig. 3 Sri Lanka energy supply patterns ( 1983)

5%o. Oil is the most imiportant source in supplying period 1978-80. Petroleum consumption hasuseful energy or net supply (46%), with fuelwood grown even more rapidly because of the increasedat 38%, and 16%o of electricity being supplied by demand for electricity in the post-1977 period,boGn hydro- and oil (useful energy was calculated which had to be met by increased thermalby their end-use efficiency-see footnotes to Table generation. Table V shows that for 1983. oil forIV for the coefficients and conversion of hydro- thermal generation in the form of diesel and fuel-power to t.o.e.). oil has increased very rapidly.

Energy has only recently become a serious Sri Lanka has access to a varietv of economicallvproblem for Sri Lanka. The oil price increase of viable, non-conventional renewable energy re-1973 made petroleum, which supplies one-third of sources-solar, wind, biomass and minihydro-the country's primary energy requirements, a which could be utilized to meet some of thesignificant factor in the balance of payments. A country's energy demand in the medium term.combination of slow economic growth and a policy Solar energy. The location of Sri Lanka assuresof stringent import controls ensured that the it of a relativeiv high and unifo-m ltvel of insola-burden of oil imports was manageable after the tion, which could be harnessed for both waterfirst oil price increase. At the same time, the heating and crop drying, A very few householdsaddition of new hydroelectric capacity resulted in a currently use hot water; the main market for thesecomfortable balance between electricity supply heaters will initially lie in the commercial andand demand, thus containing a demand for oil by tourist sectors. The use of solar energy fctr cropsubstituting hydro-generation for thermal drying is an important alternative to be developedgeneration. Table V indicates that the amount of because tea and other crop processing industriesfuel and diesel oil used for thermal generation until consume over one million tons of fuelwood, or an1979 was very low. estimated 20% of total consmamption, per year.

Since 1978, with the rapid improvement ineconomic performance following the adoption of a Minihydro. While emphasis in Sri Lanka hasmarket oriented development strategy, the been on large hydro-power schemes, about 10 MWamount of fuel and diesel oil used for thermal of small schemes 5-250 kV range) have beengeneration increased dramatically. Along with this operating in the tea estates of the central regionchange, there has been a substantial increase in since 1925. However, these have been abandoneddemand for all forms of commercial energy, which because of the availability of chedp and reliablerose in aggregate at a rate 8.8%O per annum in the electricity from the national grid. In addition to the

NRF VOI. 10, NO. 1, 1986 MICROCOMPUTER APPLICATION OF INEP 27

rehabilitation of existing plants, potential sites for Estate, and Wet Zone and Dry Zone.minihydro schemes exist in the hilly areas and in Nevertheless, preliminary analysis suggests asthe irrigation systems in the north central part of typical the energy consumption pattern illustratedthe island. in Fig. 4. Transport consumes 54% of Sri Lanka's

Other renewables. Apart from solar and mini- commercial energy, while industry and coni-hydro, a number of renewable energy applications rnercial consumes 26%, with domestic demandare promising. These include generation of biogas amounting to 17%, and others 3%. These percent-from animal wastes, producer gas from rice husks ages change dramatically when fuelwood isand coir briquettes, wind energy for water pump- included in the analysis-then domesticing and electricity generation in isolated areas. consumption accounts for the major share (68%),

It is roughly estimated that all of these will industry and commercial for 18%, transport forcontribute only about 2% of total energy require- 13% and others for 1%.ments in 1990, and less than 5% by the year 20V(). Even though the data available are not asNevertheless, even this modest contribution will reliable as might be wished, some usefulbe useful because it will help to displace expensive information about consu-mption patterns andimportedl oil and scarce domestic fuelwood at the trends is discernible.n. roin. Fuelwood. The absence of reliable data on

fuelwood makes it difficult to identify the pattern3.2.2 Enerwry demand by 'vsoUirce in total energy demand and to correlate it toDeveloping a detailed picture of sectoral energy economic variables. Past estimates indicate noconsumniption patterns in ari Lanka has been major shift from non-commercial to commercialha-rper<>d by t+ absence of reliable data at a energy sources over the last two decades. In fact,Xsuf!cientiv dis--Trega:. A level, even for the the data point towards an increase in the con-c miner i! fuels. With the inclusion of fuelwood sumption of fuelwood as prices for commercialthl mai gin rf' errt-ir iii r .c because estimates of fuel such as kerosene increase.fueiwoo(i '-' -io%uwtit,v k, tvnd to vary considerably Commercial enertgy. The consumption trcnds ofded-.. I. .r ; *..L-> However, the best commercial energy have closely reflected thees. i. ^iL 98i ;t?bfr fiaelv.. ood (used in the Energy overall performance of the economy. Between

Table) j abpout ''iillion tons per year. A 1970 and 1977 the near stagnation of economicmn.i-. Afort has rucentlv hc.ri launched to identifv activitv and growth in real incomes was reflected inh - il fit.iu Ad coi-Imption at the dis- a largely constant level of commercial energyaggre-ite levei, i.e Urh,,;n, Suburban, Rural, demand, with rising electricity consumption being

4: ome3 /DL0*: *amo -- -- 68os,

5 4% ~ri~sTrlj: a.,,

.orn)rr.erClG' < w n X i/

26 9Isro.a~X,I / commerciai /

'TrunspCr' ' /r

LTher 1 N

OGrnmercIG eer s Ai energyE!ectr ter'd oil, 1983 Electricity,oi! anI fuek,

Fig. 4 Sri LIanka energy consumption patterns (lcA)


offset by an average 3.3% per annunm fall in the include the 3% reduction in demand due todemand for petroleum products. With the liberal- prolonged power cuts in 1980 which was caused byization of the economy, demand for all forms of the high growth rate of consumption and ancommercial energy has increased at an average unexpected and severe shortage of rainfall. Therate of 8.8% per annum, import of electrical appliances for domestic use has

From 1970 to 1977 the consumption of all also contributed to the increase in sales to thepetroleum products fell, with the exception of household sector. The post-1977 increase inLPG (used mainly for cooking) and diesel auto- electricity consumption has had a significantfuel. This has been partly due to the virtual impact on the economy, because this demand hadelimination of petroleum-based electricity to be met by increased imports of petroleumgeneration that followed the addition of new products for use in thermal generation.hydroelectric capacity, and partly due to theresponse of demand to the doubling of prices in a 3.2.3 Energy demand by sectordifficult economic period. Since 1977 most In the energy balance tables that have beenproducts have shown increased growth in an compiled for this study, the sectors have beenimproved economic climate. The oil demand in the demarcated in the following manner (Table VI). 1,power sector for thermal generation has shown Industry/agro-industry; 2, transport; 3, house-more than average increases for diesel and fuel-oil. hold/agriculture; 4, government, commercial, andOnly the consu.mption of gasolene and kerosene others.continued to fall after the post-1i977 period. This Industry-agro-industry. The industrial sectorwas a reflection of the price-sensitivity of demand accounts for more than 50% of electricity con-for both these goods. sumption, about 33% of petroleum consumption

In contrast to petroleum consumption, and about 25% of the fuelwood used in theelectricity demand has continued to grow at an country. Fuelwood is an important source ofaverage annual rate of 7% during the period 1970- energy for agro-industry in the rural areas, (e.g.77. This has been due to (a) the attractiveness of tree crop processing). Eighteen large industrialelectricity as a source of energy (because there organizations in the public sector account for 35%were no tariff increases during this period) and (b) of total electricity sales; while 10 large companiesthe existence of a potential untapped market account for over half of the sector's petroleumfor electricity. Consequently, the demand for consumption. In Table VI the sluggish growth ofelectricity has shown less responsiveness to price industry from 1973 to 1975 can be seen in theand to changes in economic performance than decline in energy demand during this period.have petroleum products which rose in price by Transport. This sector depends erntirely onmore than 50%. Since 1977 electricity demand has petroleum products for energy, and transportaccelerated-electricity sales grew at an average therefore accounts for more than half of the totalof 9.6% annually until 1980. This figure does not demand for petroleum products. Diesel is the

TABLE VI

Sectoral detnanc4 for energy

ELnergy-consuming sector 1973 1974 '1975 1977 1978 1979 1980 1981 1982

Industry/agro-industrv 781.78 716.52 699.306 886.(9 966.25 989.(1 909.25 998.2 1003.88Transport 474.38 407.43 411.93 441.31 503.45 523.42 578. 597.76 658.Household/agriculture 1604.51 1729. 1804.35 1858.64 1763.63 1762.16 1914 90 1967.45 1908.75Government, commercial 16.3 13.31 18.34 26.39 29.03 33.58 36.41 35.85 41.09

and othersTotal 2876.68 2869.31 2933.93 3212.43 3263 .36 3308.17 3438.56 3599.26 3611.72

N.B. Units in million t.o.e.


predominant transport fuel (75% of the sales), Ceylon Electricity Board-CEB; Mahaweliwhich reflects the extensive public transport Ministry/Mahaweli Authority-MA);network, and also the policy of pricing diesel well (b) Petroleum (Ministry of Industries andbelow gasolene. As a result of this price Scientific Affairs/Ceylon Petroleumdifferential, the proportion of diesel car Corporation-CPC);registration rose from 14% in 1978 to 35% in 1980. (c) Fuelwood (Ministry of Lands and LandTo reverse this trend, the government raised the Development/Forest Department-FD);price of diesel to 60% the price of gasolene in (d) Overall science and energy policy and1980-81, and increased the licence fees of diesel research and development (Naturalcars to three times that of gasolene cars. Resources, Energy and Science Authority-

Household-agriculture. While per capita energy NARESA).consumption in Sri Lanka is low by international In late-1982 President Jayewardene set up anstandards, and most households use energy for Energy Co-ordinating Team (ECT), under aonly cooking and lighting, the energy require- senior energy adviser, to help to remedy thisments in the household sector account for nearly situation. The rationale underlying the ECThalf of the country's primary energy consumption. concept was that the new framework, in the firstThe bulk of household energy requirements is met instance, was not intended to be anotherby fuelwood, which will continue to be the bureaucracy that would seek to control the energypredominant source for the next decade. Only sector. The objective was to co-ordinate and13% of households have access to electricity, and facilitate the work of relevnt rninistries andthe consumption of kerosene, which is mainly used existing line agencies, prevent duplication of effortfor lighting, has been declining over the past and policy conflicts, supplement weak or neglecteddecade in response to higher prices. The demand areas in the energy sector, and provide directfor energy in the household/agriculture sector will advisory inputs to the President. In any case,continue to grow with the increase in population major structural changes in the organization of theand the rising standard of living. energy sector could not be undertaken in the short-

Government, commercial and others. This run. The ECT framework was the most practicalsector consumes about 1% c of the total demand for method of formulating energy policy in anenergy in the economy. integrated manner and carrying out urgently

needed tasks in the sector.3.3 ENERGY POLICY CO-ORDINATING ECT consists primarily of three co-ordinating

FRAMEWORK task forces that cover the following areas:(a) Energy Planning and Policy Analyis

During the last three years an effective (EPPAN);organizational framework for overall energy co- (b) Energy Efficiency, Demand Management andordination and integrated national energy plan- Conservation (EDMAC); andning and policy analysis has been set up. In (c) New, Renewable and Rural Sources of Energyparticular, a number of urgently needed and bene- (NERSE).ficial, specific activities have also been carried out, The co-ordinating task force (CTF) memberssuch as the preparation of the national energy are senior managers from the relevant linestrategy (NES), the national energy demand organizations seconded to help in ECT activities,management and conservation programme and therefore they could be relied upon to(NEDMCP) and the national fuelwood conserva- implement ECT policy. Decisions agreed at CTFtion programme (NFCP). meetings would normally be conveyed to the

In mid-1972 a major barrier to effective President through the senior energy advisor and, ifintegrated energy planning was the large and necessary, would reach the appropriate linevaried number of ministries and line agencies agency through the Cabinet, thereby increasinginvolved in the different energy subsectors, with the effectiveness of implementation.inadequate co-ordination among them (Fig. 5). All of the ECT staff were drawn from the(a) Electricity (Ministry of Power and Energy/ Ministry of Power and Energy (MPE) or seconded


| The Pre si dent | I

| c a b I n e t

i| m yf Mnistry of Minist of r l

Energy of-ard. tetmer

NARESA efficiencyindustries dandweNw lands and larnd ne desan paigy cnd sc affairs aevenopalne development minisergy

W a r .i a g g r a j p s

Office of the X

senior energy advisorEg ornatin nergy co-ordina am

r-Ke:-s-n C--B-o- -E-i- -B-N-A-R--N-t-R-o

Energy ad Sciene Authoity; CP = Ceyln_Petroeum CorordtatinmAMB=MhaeiAtoiy

I : support stuoff ll

l De e -o r d -I n a t F n g t a s k f o r c

Not Energy pkcenning T n a Woergy efficGency, de(Gnd a dNew, renewable v and sm i i nd policy anmlysis a management and conservation rurTF sources oW energy l

to ( EPPAN) f (EDMAC) e ENERSEA E SP and r k wI n g i r 1 S p s

Fig.5 Organizationofnewenergy co-ordinating frameworkdKey: v vl iaison/regular consultation; CEB = Ceylon Electricity Board; NARESA aNatural Resources,Energy and Science Authority; CPC = Ceylon Petroley Corporationm tpA/MDB c Mahaweli Authority/Mahaweli Development Board; FD-=Forest Department.

Note: Task Forces (TF) and Working Groups (WG) are drawn from relevant energy supply and consumingministries, goverenent agencies and pivate sector organizations. TFs and Wos also liaise with and co-ordinate efforts of energy groups in other ministries and agencies.

to this ministry from other bodies. The entire ECr 4. NATIONAL ENERGY STRATEGYthercoroe gradually fell more under the Ministry ofPower and Energy, while retaining its inter- 4.1 SCENARIOS AND ANALYriCAL DESIGNministerial policy co-ordinating role. Thesedevelopments have essentially permnitted MPE to The analytical approach adopted for this study wastake a greater responsibility for INEP and policy to superimpose the policy options that lie underanalysis, and to build more capability in the energy the control of the Sri Lanka govemment onto aarea-an aspect that had been relatively neglected series of scenarios that capture the key externalbefore 1983, due to the MPE's ahnost exclusive factors over which the decision-maker has nopreoccupation with the CEB and electric power. control. Among the most important of theseThe creation of the Lanka Electricity Company external factors are the world oil price, the overall(jointly owned by the CEB and Ministry of Local state of the world economy, which determines SriGovernment and Housing) in 1984, to gradually Lanka's external trade environment, and suchtake over the local authority networks, and factors as the level of interest rates on the externalincorporation of the CPC within the MPE early in debt. Because of the dependence of the electric1985, greatly strengthened policy co-ordination in sector on hydroelectricity, rainfall variationsthe commercial fuel sector (i.e. electricity and oil represent another important source ofproducts). uncertainty.


4.1.1 Economic growth predictions: they are used in this study for the soleIdeally, one would wish to project the domestic purpose of examining the consequences of energyeconomic growth rate as a function of domestic policy options under different sets of conditions.policy, and the external environment. However, 4.1.2 Oilpricethe present state of the art of macroeconomic The futrecomodelling is such that great difficulties are still The future condition of the world oil market is

enC°nteed n quntiyin som oftheke extremely difficult to foretell. Moreover, theencountered in quantifying some of the key complexity of the market, with the intricaterelationships. Indeed, the experience in Sri Lanka interactions between the prices of different crudessince the economic liberalization of 1977-78 and petroleum products, further complicates thedisproves much of the common wisdom concern- sing the short-term impact of external shocks, oil SiLtuaton for a small oel-importing country sch as

price increases in particular, on the rate OIsrion tte woro supl situatio th

economic growth. dsruption to the world ollb signiia ituation, the

We have therefore elected to use the domestic next five years will bring significant changes to the

growth rate as one of the exogenous assumptions petroleum product market in South-east Asia, asof ouranalysis;threescenariosofGDPgrowthare the new refineries in the Persian Gulf come on-postulated over the period 1985-95, ranging from stream. Therefore, although we use the landeda high case of 5t5h GpP growth to 1995, to a low price of crude as the index of world oil price, weahighcase of 3*5% 5%GD growth to 199 5, tolg ao lw n shall see that the interplay of petroleum productcase of 3.5% growth to 1990, falling to 2.5% in the around this level has implications for Sri

Theabas.caseassumesa5.5%growth froms1985 Lanka of the order of millions of dollars pe-Thebas cse ssmesa .5%grwthfrm 185annum.

to 1989, which is consistent with the projection of The two scenarios examined are as follows. a-the Ministry of Finance and Planning in its latest The hannual report on Public Investment (Ministry of the high world oil price (WOP) case, we assumeFinance and Planning, 1985). From 1990 to 1995 constant real prices at US$214/tonne until 1988,

we assume that the growth rate falls to 4C'l per followed by an annual increase of 4% thereafterannum.Thisscenarioimpliesacontinuationofthe (again in real terms). This brings the 1995 real

annu .Thi scnai imle aDotnaino h rice to about the levels experienced at the vervgrowth trend over the seven years since the p t abu teconomic reforms were introduced by the peak of the oil crisis in the early 1980s. (The 1984incoming administration in 1978. Even though this average c.i.f. Colombo crude price was US$2141

trend was maintained during a period of severe tonne).external shocks-the oil price increase of 1979-80, The low world oil prce case assumes constant

sharp increases in the price of imported goods due re prices until 1989, with a 1% per annum realto worldwide inflation, as well as falling world price increase thereafter. Again, it should bemarket shares of the international tea and rubber stressed that we use these scenarios for indicativetrades-growth rates in the late-1980s in excess o opurposes only, and make no judgement as to whichthis trend are most improbable. Nevertheless, we of these scenarios is more probable. Indeed, thedo examine a case in which the 5.5% rate is entire thrust of the national energy strategy is themaintained through to the mid-1990s. identification of policy initiatives that are robust

There are, however, a number of reasons for the (i.e. relatively unafected) under the expectedGDP growth rate to be substantially less than uncertainties.5.5%. There is no guarantee that Sri Lanka's By the mild-1990s Sri Lanka wll be importingsignificant growth in manufactured exports will substantial amounts of coal, especially once thecontinue, which, together with the increasing Trincomalee coal units of the Ceylon Electricity

e w , t Board are on-line. We have assumed that coalexternal payments burden, may begin to cause prices will track oil prices, and escalate currentdislocations in the economy. Our low case scenario c.i.f. coal prices (about US$45-50/tonne) at thetherefore posits a GDP growth rate of 3.5% to same rates as oil prices.1990, falling to 2.5% in the period 1989-95.

It should, of course, be noted that these 4.1.3 Hydrological uncertaintiesscenarios are not in the nature of forecasts or A national energy strategy mus. be concerned with


short-term as well as long-term issues, of which year hydrological event). It should, of course, betemporary disruptions to the supply are among the noted that there is a one-in-five chance that thismost important. As Sri Lanka becomes more event will, in fact, occur at some time over the nextdependent on hydroelectricity, the ability of the ten-year period. Table VII presents the energyCeylon Electricity Board to cope with drought levels from hydro plants associated with these twoyears also becomes more important because most cases.of the major impoundments are concentrated in a 4.1.4 The analytical designrelatively small area of the hill country. The impact The analytical design for the model runs is shownof a failure, delay or abnormal monsoon can be 6h Ina constructing the ovel ris onpotentially quite serious, as evidenced by the in Fig. 6. In constructing the overall scenarios, onesituation in 1983. We therefore examine two cases: obvious issue is the degree to which the world oilthe current planning basis of the Ceylon Electricity price and GDP asskimptions are correlated.Board that is based on fim + 25% of secondary Increases in oil price are only one ef several typeshydro-energy, and a case based on firmn hydro- of external shocks that Sri Lanka has experiencedenergy only (that corresponds roughly to a 1-in-SO (and will experience in the future); and theadjustment mechanisms to these external shocks

can be quite complex (Munasinghe, 1984). Thus, itTABLE VII is not possible to forecast a direct impact on GDP

Energy from hydroelectric plants from a given oil price shock (as the experience ofSri Lanka in the years 1977-82 reflects very well).

Base case Firmn hvdro onlv Indeed, the impact of the relative ease with which(firm + 25%r secondary') (I-in-S0 years) Sri Lanka was able to adjust to the shocks of the

1970s, of which additional external financing was aExisting hvdro-plants 1691 1531 major part, will only now be felt as the debt serviceVictoria 767 695 obligations become due. For the same reason, theKotmale 368 4316 fac' flat oil prices are currently falling in real termsRandenigala 391 366 does not necessarily imply a faster domesticBroadlands 69 60 growth rate.Rantembe 181 158 Given these circumstances, the basic modelling

design is structured around the four possible

Low

~~Conservaytlon /s/WOP\

Hig 55High0

/ \ / \Conservation

(85-88) Firm + 25% sec aPlntation/Eld > cooking stove

GDP uewoo progrommesLow 3 5%0/85 88) Firm

o Exogenous* Policy - controlled

Fig. 6 Model runs

NRF VOL. 10, NO. 1, 1986 MICROCOMPJTER APPLICATION OF INEP 33

combinations of oil price and GDP growth. In the These favourable trends must be maintained tocase of the electric sector analysis we also include ensure good demand management. While averagethe hydro-energy uncertainties. prices are reasonable, the detailed structure of

Onto these basic scenarios, which capture the electricity and petroleum product prices need to beexogenously determined factors, we superimpose further revised-especially the price of kerosenea series of cases which reflect the policy and diesel fuel relative to that of gasoline.interventions under consideration. These include 4.2.3 Reducing the vulnerabilitv toinitiatives for energy conservation, electric sector external shocksdemand management, pricing, fuelwood planting Over the past decade Sri Lanka has experiencedand cooking stove programmes, refinery manage- numerous external shocks affecting both thement and oil import strategies, fuel substitutions, energy sector and the economy as a whole,and others. The details of these strategies are particularly the two oil price shocks of the 1970s,presented next. and the 1983-84 drought. In order to reduce this

vulnerability, diversification of both the type and4.2 TEBASICDIRECTIONSOFPOLICY source of energy is key; increasing coal use for

Given Sri Lanka's precarious balance of payments power generation and industrial energy, purchas-position, its absence of fossil fuels, and the critical ing petroleum products and crude from a variety offuelwood situation, the basic directions of policy sources, including the spot market, would allare clear. Indeed, in several areas vital and correct decrease vulnerability as well as cost.policy initiatives have already been launched. The 4.2.4 Maximizing donlestic resourcesbasic principles can be elaborated as follows. Hydroelectricity and fuelwood represent the two4.2.1 Increasing the efficiencv of ,energy lse main domestic fuels of Sri Lanka. Even ifIncreasing energy efficiency is not merely for commercial oil finds are made in the next fewshort-term benefit, but must be pursued con- years, and even if the efforts to commercializesistently over the longer term. Lacking its own other renewable energy tecnologiec -smallfossil resources, for the next 30-4() years the bulk hydro, producer gas, wind, solar heatin6, etc.-of Sri Lanka's energy must come from imported are successful, until the year 2000. conventionalfossil fuels, until sometime in the 21st century hydro and fuelwood will be the main sources ofwhen newer energy technologies mav well replace domestic energy.fossil fuels. Without a sustained effort to maximize 4.2.6 Rationalizing the institutionalframeworkthe efficiency of fossil fuel utilization, develop- Before 1983 the institutional framework wasment objectives will inevitably be compromised. fragmented, with the various energy sector line

In a similar vein, those domestic resources that institutions like Forest Department, Ceylonare available must be utilized more effectively. Electricity Board, Ceylon Petroleum Company,The forest resource is a priceless asset upon which Natural Resources, Energy and Science Auth-the bulk of the popultion still depend for their oritv, Mahaweli Development Authority, etc., allbasic energy needs. Unless fuelwood is used more reporting to different Ministries. Starting in 1982efficiently, the long-term consequences will be an Energy Co-ordinating Team was set-up tocatastrophic. Therefore, the national energy formulate and co-ordinate policy. This mechanismdemand and conservation programme, for com- is working well with each of the three task forces:mercial fuels and national fuelwood conservation Energy Planning and Policy Analysis, Energyprogramme, for improved domestic cooking Efficiency, Demand Management and Con-stoves, must be expanded rapidly and pursued servation and New Renewable and Rural Sourcesvigorously, by the task forces which have already of Energy responsible for one major programmebeen established by the Government of Sri Lanka. (National Energy Strategy, National Energy

Demand Management and Conservtion Pro-4.2.2 Efficientpricing gramme, and National Fuelwood ConservationRecent changes in electricity and oil prices have Programme, respectively), and many smallerbrought average commercial fuel prices close to initiatives. This framework should be maintainedeconomically efficient levels (i.e. border price). and strengthened.


More recently the Lanka Electricity Company 5-10 years and (iii) long-term options that addresswas created as a subsidiary of the Ceylon issues likely to be experienced after 1995.Electricity Board to take over electricitydistribution, gradually, and the Ceylon Elecricity 4.3 SHORT-TERM OPTIONSBoard was absorbed within the Ministry of Powerand Energy-further consolidating policy co- 4.3.1 Conservation initiativesordination and implementation in the commercial A comprehensive programme of conservation forfuels sector. The National Energy Strategy should commercial fuels, encompassing electricity as wellbe implemented using the framework of the as petroleum products in the transportation andEnergy Co-ordinating Team for overall co- industrial sectors, is of high priority. This will haveordination, and the line agencies for long-term as well as short-term benefits. If theimplementation. present goals of the Energy Demand Management

The specific policy initiatives necessary to and Conservation programme are met (see Tableimplement these broad directions can be divided VIII), the savings on the aggregate oil import billinto three categories: (i) short-term options that by 1990 are estimated as shown in Table IX. Inprovide measurable results within 1-3 years (ii) addition, the electric utility has already launched amedium-term options, whose gestation period is programme to reduce its own losses from aboutsuch that implementation measures must be 20% of generation in 1984 to less than 15% byundertaken now, even though results will require 1990.

TABLE VIIINational Energy Demand Management and Conservation

Programme-conservation goals

Equivalent annuial1990 saving (%7r) impact on growth rate (%)

ElectricitvaDomestic 5 -1.0Large industry5 10 -2.0Sniall + medium industrv 10 -2.0Commercial 10 --2.0Local authoritv 5 -1.0

Petroleum productsAuto-diesel 10 -2.0Gasolene 10( -2.0Fuel-oil 10 -2.0

The Ceylon Electricitv Board loss reduction programme is included in thebase case.

b In addition, the conservation scenario assumes implementation of theindustrial projects identified in the recent World Bank pre-feasibilitystudies over the period 1987-89.

TABLE IXImpact on the Cionserv'ation Programme

oil import savings (US$ million)

1988 1992

Base case GDP growth 31.(0 69.4Low GDP growth 22.8 51.6Base case GDP low WOP 30.2 61.5


The conservation programme is therefore seen expansion plan of the Ceylon Electricity Board,to provide substantial benefits independently of attainment of the electricity conservation targetsboth the rate of economic growth and the state of reduces oil consumption to very low levels, even inthe world oil market. Moreover, as may be seen in drought years.our detailed analysis of the electric sector (Fig. 7), 4.3.2 The National Fuelwood Conservationthe conservation programiime also serves to cushion Programmethe impact of droughts; under the current capacity The detailed analysis (see Fig. 8) shows the

400-

0

o 300 - Drought yeoro without conservation Reduction in oil0 consumption due to

conservation programme0

E 200 - Drought year withconservation

0

m 100

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Yeor

Fig. 7 Impact of conservation pr agramme on Ceylon Electricity Board (CEB) oil consumption in any givendrought vear

2 0 -

o -- C

0

Opiisi 1989

o \ Wl~~th okne - \ stoveprogrammeo\ (FCP) 2

0)0

stove programme

1980 1990 2000 2010

Year

Fig. 8 Evolution of natural forest area under different scenarios


urgency of the problem, and the potential impact Whilst the precise impact is subject to uncertainty,of failure to pursue the programme with the in light of the worldwide excess refining capacity,greatest urgency. Our estimates indicate that from the low crude acquisition cost for these refineriesfuelwood consumption alone (i.e. ignoring such will undoubtedly allow them to increase theirfactors as construction timber demands), the market share of refined products at the expense ofnatural forest cover will decline from about 1.6 older, smaller refineries.million ha (about 24% of land area) to 0.3-0.5 . .million ha by 2010, depending on assumptions 4W3e4 Pricing policyabout the sustainable yield. Obviously, at these We have examined the importance of maintaininglevels of resource depletion, sharp price increases a domestic petroleum produact pricing systefor fuelwood can be expected, leading, in turn, to based on the foreign exchange cost to the country,possible substitution bv expensive, imported by simulating the energysystem under alternativepetroleum products. Moreover, the environ- price elasticity assumptions. Case 1 (Table X)mental consequences of almost complete denu- assumes that domestic prices will stay at theirdation of forest cover are equally severe The current levels in real terms: the impact on oilNational Fuelwood Conservation Programme in- consumption (and the oil iInport bill) is simulatedvolving the rapid and systematic introduction of by assuming zero price elasticity of demand. Casesefficient cooking stoves into 2.5 million house- 2 and 3 xeflect different levels of price response toholds over the next five years, must be given top the increases in the real price of oil following thepriority. base case scenario for the world oil price.

These results indicate the serious consequences4.3.3 Oil acquisition strategy of any failure to maintain domestic retail pricesGiven the volatility of the world oil market, the consistent with border or economically efficientprincipal priority is for a more flexible acquisition prices.strategy that can respond quickly to relative pricechanges. Our detailed analysis indicates that whilstthe current operation of Sri Lanka's oil refinery is TABLE Xnear optimal, small changes in relative prices have Imipct of petroleum product pricing policva significant impact, particularly when crude pricesare in imbalance with those of refined products. A Oil imports Foreign exchangestart towards more flexible operation has already Case (x l0ooot.o.e.) ($ million)been made by allowing Ceylon Petroleum Com- No price adjustment 2678 625pany to purchase a higher fraction of crude on spot Prices adjusted tomarkets, and a refinery optimization model, based border priceon the one developed by the Energy Co-ordinating -0.15 2594 596Team, will be used to assist purchasing strategy. =- 0.3 2517 568The Single-Point Mooring Buoy project will also oil - coal imports less hunkers and petroleum product exports.serve to lower the total crude cost by about $61tonne and will have the additional benefit ofreducing congestion in Colombo harbour. How-ever, there remain some areas where lack of 4.4 OPTIONSFORTHEMEDIUM-TOLONG TERMflexibility hinders optimal management, such asthe long time-lag involved in adjusting, foreign A second set of options can be expected to becomebunker prices. effective over the medium- to long-term: even if

Continued attention to the oil acquisition they are implemented aggressively it will be atstrategy is especially waranted in light of the least 1990 before they will have any measurablesignificant changes in the regional oil market impact on the overall energy situation. However,anticipated as a result of the large additions of just because of their long gestation period, it isrefinery capacity in the Persian Gulf countries that important that these programmes begin to bewill come on-stream over the next few years. pursued vigorously now.


4.4.1 Plantation programmes our analysis indicates that these technologiesWhilst the National Fuelwood Conservation would displace only 2% of the Ceylon ElectricityProgramme is clearly essential, it must be Board's 1995 generation. The correspondingrecognized that even an aggressively promoted reduction in the oil import bill amounts to only 1%cooking stove programme does not address the by 1995.long-term problem. Indeed, our detailed analysis Finally, we turn to a discuission of some long-run(see Fig. 8) shows that the breathing space options, which will not affect the energy systemafforded by a fuelwood conservation programme until well after 1995, but which merit continuedover the next few years must be used to put in place attention.a plantation programme of at least 10 000 ha per 4.4.3 Nuclear energyannum, in addition to the programmes already Until the electric system load reaches at leastunder way (that provide for about 5000 ha per 2000-2500 MW, nuclear power plants are notannum). The long-term foreign exchange con- viable on the basis of present data, from asequences of a depleted forest resource are technical, systems and economic standpoint.extremely serious, quite aside from the impact on Because a 200() MW demand can be expected at therural families whose household budgets would earliest by the end of the century, nuclear powerthen face the cost of commercial fuels. Ini 1985, would be an option only beyond the year 2000.fuelwood is estimated to have produced some 4300 However, it should be noted that unlike othertons of oil equivalent of energy: even when one South Asian countries, whose longer-term powertakes into account the much higher efficiences at generation prospects are expected to rely heavilywhich petroleum-utilizing devices operate, this on domestic resources (lignite, coal and naturalstill represents an avoided foreign exchange cost of gas), the long-term prospects for power generationUS$200 million. in Sri Lanka are unclear. Even if all the remaining

4.4.2 Renewables hydropower is exploited, including small hydro, atA New, Renewable and Rural Sources of Energy some point substantial thermal generation fortask force has been established by the Government baseload is inevitable. Therefore, whilst nuclearof Sri Lanka to co-ordinate the development of a energy is not an option of any immediacy, thevariety of renewable energy sources. Whilst some situation needs periodic review, especially ifof these technologies appear promising, a con- technical innovations make economic smTallercerted effort will be necessry to establish coherent units in the 300-500 MW size range. Training ofimplementation. To examine the scope of the manpower and monitoring of nuclear techno-impact of such efforts, we have postulated an logical developments abroad should be pursued,optimistic scenario for the penetration of these to maintain readiness.technologies into the economy, as shown in Tablexi. 5. CONCLUSION

Even under these rather optimistic assumptions, The basic rationale for developing the concepts

and methodology of integrated national energyTABLE XI planning (INEP) may be traced to the oil price

Maximum possible renewable case increases and energy crises of the 1970s. The need

for more co-ordinated, systematic and effectiveenergy policy formulation and implementation

Basis 1995 GWh resulted in the development of a hierarchical

Small hydro 15 MW by 1995 39 framework for INEP and policy analysis. ThisWind 5 MW by 1995 26 approach includes analysis at three interrelatedProducer gas One 150 kW unitlyear 5 levels: the energy-macroeconomic, energy sectorSolarwaterheaters 30 00 panels in place, 21 and energy subsector levels.

Photovoltaics 10(k) panelsqinplace The INEP methodology and models may beBiogas 5000 systems, 1.8 kWh/day 11 implemented quite straightforwardly and inex-

pensively using presently available 16-bit micro-

38 MOHAN MUNAS!,NGHE NRF VOL. 10, NO. 1,1986

processors. All computerized activities should be well. It should be noted that in Sri Lanka thefirst verified through manual calculations, at a success achieved in the energy sector arose notrelatively simple level, and only later. as local only from the systematic application of theanalytical skills and understanding improve, hierarchical microcomputer-based INEP model-should more-sophisticated computer models be ling methodology, but also because of a number ofdeveloped. The models must reflect the real-world related improvements, such as the clear identi-constraints as closely as possible, and have a policy fication of national policy goals, selective and co-focus that will facilitate quick responses to the ordinated use of policy instruments, restructuringkinds of questions that senior decision-makers of the organizational framework to strengthenmight normally pose. policy formulation, co-ordination and imple-

The application of this approach in Sri Lanka, mentation, and the training of local staff andduring the past three years, indicates that it has institution building.great promise for other developing countries as

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IDRC-UNU 1985. Priorities and Directions for Energy Research aInd Policy in Dei-elopitng Countries. EnergyResearch Group (IDRC-UNU), Ottawa.

Ministry of Finance and Planning 1985. Public Inves 7ent Programme 1984-1988. Government of Sri Lanka,Colombo, Sri Lanka.

Munasinghe, M. 1979. Thle Economics of Power System Reliability anid Plannsing. Johns Hopkins UniversityPress, Baltimore.

Munasinghe, M. 1980a. Integrated National Energy Planning (INEP) in developing countries. Nat. Resouir.Forum, 4.

Munasinghe, M. 1980b. An integrated framework for energy pricing in developing countries. The hEnergy J. 1(July).

Munasinghe, M. (Ed.) 1980c. Energy in Sri Lanka, SLAAS, Colombo.Munasinghe, M. 1983. Third World energy policies: demand management and conservation. Energy PolicY. 4

(March).Munasinghe, M. 1984. Energy strategies for oil-importing developing countries. Nat. Resour. J., 24 (April).Munasinghe, M. and Warford, J.J. 1978. Shadow pricing and power tariff policy in developing countries. In

Marginal Costing and Pricing of Electrical Energy, Canadian Electrical Association, Montreal.Munasinghe, M. and Warford, J.J. 1982. Electricitv Pricing, Johns Hopkins University Press, Baltimore.Munasinghe, M., Dow, M. and Fritz, J. (Eds) 1985. Microcomputers for Development. National Academy of

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